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IT is not everyday that one gets to pick up an airplane from
Toulouse, France and bring it to the Philippines. But on Aug. 13, 2011, I
was fortunate to be part of a 29-member Filipino delegation that did
just that when we traveled all the way to Toulouse to pick up Air Asia
Philippines Inc.’s first Airbus A320.

Airbus is the current leading aircraft manufacturer based in
Toulouse. Because of its reliability, innovativeness and craftsmanship,
Airbus has become one of the most trusted names in the airline industry
all over the world.

It is the leading supplier of civil airliners to the Philippines,
accounting for over 80 percent of all passenger aircraft flying with
airlines in the country today. Airbus has been supplying airplanes for
airline companies in the country since 1978 when flag carrier Philippine
Airlines ordered its A300B4, the world’s first widebody twinjet
airliner more popularly known as the "Lovebus."

This year, it is Air Asia Philippines’ turn to mark yet another
milestone in the airline industry when its first of four Airbus A320
planes landed the country last August 15.

From Toulouse, the Airbus A320 was flown by an all-Filipino crew
composed of Captains Johansen Hernandez (commander of the ferry flight),
Edward Samaniego and Primo Dagondon and First Officer Robert Kaw Sing.
Capt. Hernandez flight tested the A320 in Toulouse prior to the flight
back home.

Even the flight stewardesses were all Filipinos - Vivienne Escobar,
Ghia Rivera, Thelma Reblora and Lorielyn Sanglay – chosen from Air Asia
Berhad, Air Asia’s parent company based in Malaysia, where they had
served as attendants for the past five years.

Maan Hontiveros, chief executive office of Air Asia Philippines,
said she chose an all-Filipino crew to highlight that Air Asia
Philippines will be run by a dynamic all-Filipino team. "We are bent on
showing the world that, yes, the Filipinos also can, and on building an
airline that is Filipino-owned, Filipino-run and world-class," she said.

Assisting Hontiveros in the trip were Air Asia Philippines officers Sarah Elizabeth Adan and Eric Arejola and lawyer Joy Caneba. Also present were inspectors from Civil Aviation Authority of the
Philippines (CAAP), namely, Captains Jess de Dios, Karl De Guzman and
Michael Manuel, who evaluated the air-worthiness of the plane in
compliance with government standards and requirements. Engineer Mike
Tabelon was also on hand to painstakingly make sure that the new plane
was performing at its best at each flight.

The very amiable Ambassador to the Holy See Merceditas Tuazon,
close friend Josee Bantug and Fr. Ted Lopez, who is based in Rome, also
joined the ferry flight. Completing the entourage were members of the media who certainly had a fun time chronicling the whole event.

It is also worth mentioning that Airbus also sent its
representatives to the first flight, namely Captains Dominic Henry Chin,
Selvam Velaitham, Firhad Uzir and Vong Chun Kee, to make sure
everything was in order. They, however, did not join the group in the
last leg of the flight to the Philippines.

En route to Toulouse, members of the group flying from Manila had
to first make a nine-hour stopover in Kuala Lumpur for the connecting
flight to Orly in Paris. While waiting for the connecting flight, the
members of the media were given a tour of the Air Asia Berhad
headquarters at the LCC Terminal by Air Asia Berhad’s very accommodating
communications officer Desiree Bandal, a Filipina from Dumaguete City.

While on tour of the Air Asia Berhad office at 8:30 p.m., we were
pleasantly surprised to see no other than Air Asia Berhad owner and
chief executive Tony Fernandes still at his desk working. Known for
being a workhorse, Bandal said her boss would usually work late to make
sure the company is not only doing well but also to continuously
introduce innovations in the airline industry.

Fernandes has proven himself to be a most unique and
highly-effective CEO. Known for his musical inclinations, having been a
regional director of Warner Music, he decided to venture into the
airline industry right after the September 2011 attacks in the United
States. Everyone thought he was crazy to engage in such a venture given
the expected slump in airline travel after the attacks and the
problematic state of Air Asia back then.

He went on to buy Air Asia, the cash-strapped and heavily in debt company, for one Malaysian ringgit (P14).

But being known for his vision and no-nonsense straightforward
leadership style, he turned the problematic Air Asia into one of the
leading carriers in Southeast Asia. After just a year in operation, he
wiped out Air Asia’s 40M ringgit debt by introducing Asia’s first budget
airline concept. With its slogan "Now Everyone Can Fly," Air Asia is
now operating on 172 routes in 78 countries flying 400 flights a day.

Air Asia has been voted Skytrax World’s Best Low Cost Carrier for three consecutive years from 2009 to 2011.

Air Asia Philippines is one of five affiliates of Air Asia Berhad.
It is owned by Hontiveros, who has known Fernandes since their days at
Warner Music, businessmen Tony Boy Cojuangco and Michael Romero, CEO of
Harbour Centre Port Terminal Inc. They own 20 percent each of Air Asia
Philippines while Air Asia Berhad holds the remaining 40 percent.

Hontiveros said she was the one who introduced Cojuangco to
Fernandes. Cojuangco and Romero are, on the other hand, co-owners of the
Asian Basketball League champion team the Philippine Patriots. Air Asia
is a major sponsor of the team.

Arriving in Toulouse, we were treated to a hearty dinner, French
style, by Airbus executive Stephanie Henrion. The next day, we were off
to a tour to Airbus’ assembly line in Toulouse as well as to its mock
room for its models.

While in the Airbus headquarters, we learned the following:

• Airbus offers the most modern and comprehensive family of civil
airliners on the market, ranging in capacity from the best selling A320
family to the 500-seat A380.

• Airbus consistently captures about half of all commercial
airliner orders and achieved record aircraft deliveries over the past 7
years.

• Airbus has sold over 10,800 aircraft and delivered more than 6,800 since its creation in 1970.

• At current production, Airbus backlog represents 7 years of production.

• Every 2.4 seconds, an Airbus takes off or lands.

• Airbus Military is also the global leader in the market for military transport, tanker and surveillance aircraft.

It was Hontiveros who led the team for the Airbus ferry flight as
she made sure everyone had a grand time during the flight. With only 34
people onboard, it was a truly unique experience. At one point, a mass
partly in Italian was held on the flight officiated by Fr. Ted – a truly
riveting experience for anyone.

On board the ferry flight, the crew and the passengers were treated
to sumptuous French meals – lobster, fresh vegetable salad, foie gras,
crab omelette, a wide array of cheeses, deserts and fresh fruit medley,
just to name a few, with endless serving of wine, of course – fit for
those flying first class. It was after all a once in a lifetime
experience.

Capping the event was the arrival ceremony at the Diosdado
Macapagal International Airport (DMIA) in Clark Freeport, Pampanga,
where water cannons welcomed the A320 upon landing with the all Filipino
crew waving the Philippine flag from the cockpit. Truly a proud moment
for Filipinos.

Hontiveros said the entry of Air Asia Philippines in the local
airline industry will revitalize the tourism industry with Clark as its
center. She said Air Asia Philippines, with its hub at the DMIA, will
bring in five million passengers in the next five years.

"The arrival of AirAsia Philippines’ first aircraft today reflects
our commitment to the development of the country. This is only the start
of all the positive things that we can do for our beloved Philippines,"
Hontiveros said.

She added: "(B)anking on a strong brand and sound business
fundamentals, we are confident that we will also be able to grow a
company that will bring pride to the Philippines. This is a brand that
we aim to grow well so that it can serve as an inspiration to the
business community and the country as a whole."

Air Asia Philippines first A320 is expected to start commercial
flights in October to Hong Kong, Macau and Singapore. Its second A320,
which will come in October, will service passengers going to and from
Bangkok, Incheon in South Korea and local flights to Kalibo, Aklan, and
Puerto Princesa in Palawan. The other planes will be flown in next year.

Romero said Air Asia Philippines has made orders for 13 Airbus
planes which will offer more affordable flights for Filipinos and
tourists all over the country and the world.

In such a short period, new friendships were fostered forever bonded by that most unique experience.

The Philippines will not only gain a new airline with the entry of
Air Asia Philippines but it will most surely gain a new friend, a new
ally in travel – where I am sure more lasting friendships, just like
those made during the ferry flight, will be created.

The Temporary Operators Permit (TOP) will allow AirAsia Philippines (AAP),to start regular commercial flights out of Manila - Clark in October. The TOP will serve as the airlin's provisional authority as it seeks the issuance of a Congressional Franchise (CF) from the country's legislative body, and certificate of public convenience and necessity (CPCN) from CAB.

AAP plans to commence flights from Manila-Clark to Hong Kong, Bangkok, Singapore, and Macau initially. They are also planning an inter-continental flight to the United States from its Clark hub for the entire AirAsia network's routes in the future. The parent company already flies to Kuala Lumpur and Kota Kinabalu from its airport base in the Philippines.

AAP Chief Executive Officer Marianne Hontiveros said their fleet is expected to expand to four Airbus A320s by June next year. Earlier, their first brand new A320 plane was delivered in August 15 with another one arriving in November and the third frame in January 2012.

The second plane is expected to ply the routes of Bangkok, and Incheon, and possible domestic flights to Kalibo, and Puerto Princesa if there is no opposition to their domestic application.

Singapore-based Tiger affiliated airline SEAIR has been encountering opposition to operated domestic points in the Philippines.

The Philippine subsidiary is the fifth member of AirAsia Group, along with AirAsia Thailand, VietJet AirAsia, AirAsia Indonesia, and AirAsia Japan.

AAP is a joint venture between parent AirAsia Berhad (40%) and local investors (60%) led by businessman Antonio “Tonyboy” Cojuangco, Romero and Hontiveros in equal shares (20%).

Cebu Pacific, which has remained in the black in 1H2011 despite soaring fuel costs, does not expect the Oct-2011 launch of AirAsia Group’s new Philippine affiliate to curtail its growth or impact its profitability. Philippine Airlines (PAL), which was back in the red for the three months ending 30-Jun-2011, should also not be significantly impacted by AirAsia’s entry into the dynamic Philippine aviation market although the flag carrier continues to struggle against some of its existing low-cost competitors including Cebu Pacific.

AirAsia Philippines will become the country’s sixth low-cost carrier in Oct-2011, when it plans to commence operations from a base at Manila alternative airport Clark. The new carrier took delivery of its first A320 earlier this month and has begun the process of applying for a Philippine AOC.

Malaysia-based AirAsia, which owns 40% of AirAsia Philippines with the remaining 60% owned by Filipino entrepreneurs, has allocated the new affiliate two of its 2H2011 A320 deliveries and two of its 2012 A320 deliveries. AirAsia Philippines announced on 15-Aug-2011 that it will use the first aircraft from Clark to Hong Kong, Macau and Singapore while the second aircraft will be used for services from Clark to Bangkok and Seoul as well as the domestic destinations of Kalibo and Puerto Princesa.

AirAsia Philippines to compete against Tiger and Cebu Pacific on initial Clark routes

Both Cebu Pacific and PAL currently serve all of AirAsia Philippines’ initial seven destinations but their hubs are at Manila International, just south of the city centre, rather than Clark, which is approximately 80 kilometres north from the Manila city centre but is able to pull on demand from the north vicinities. PAL does not have any services at Clark while Cebu Pacific has only 20 weekly flights from Clark, including 17 to Bangkok, Hong Kong, Macau and Singapore. But from Manila the carrier currently operates more than 70 weekly frequencies to the same four destinations, according to Innovata schedule data.

“Clark isn’t Manila,” Cebu Pacific chief executive advisor Gary Kingshott said during a conference call with media last week to discuss the carrier’s 2Q2011 results. “It appears there will be a substantial amount of capacity added to the market ex-Clark. I’m not sure that will be pretty picture but it won’t impact us.”

Mr Kingshott says Cebu Pacific’s experience is that yields are on average 20% lower from Clark than closer-in Manila. Clark is already the base for SEAir’s new Tiger-branded low-cost operation, which launched in Dec-2010 and now consists of two A319s deployed only on international routes: Hong Kong, Macau and Singapore. Clark is also the base for tiny low-cost carrier Spirit of Manila, which only operates international services and currently only has two destinations: Macau and Taipei. The Philippines’ other two low-cost carriers, AirPhil Express and Zest Air, are based at Manila International and predominately operate domestically.

Cebu Pacific now has a 45% share of the Philippine domestic market

AirPhil has a 19% share of the domestic market while Zest has 12% and Cebu Pacific a market-leading 45%, according to 2Q2011 data from the Philippine CAB. Cebu Pacific also has 16% share of the international market, based on 1Q2011 data. PAL has a 26% share of the international market while foreign carriers account for most of the remaining 58% as AirPhil, Zest, SEAir and Spirit of the Philippines all have very small international operations.

Cebu Pacific, which according to Ascend data currently operates a fleet of 33 aircraft with another 59 on order, is confident it can capitalise on its status as the first and largest LCC in the Philippines. The carrier expects to continue growing at least as fast as the overall market. Mr Kingshott says the carrier’s “baseline assumption” is the domestic market will continue to grow at a clip of about 15% per annum.

Cebu Pacific CEO Lance Gokongwei is confident of retaining its current domestic and international market share, despite competition from five other LCCs and flag carrier PAL, as it is adding capacity at a faster rate than its competitors. Cebu Pacific will take delivery of seven additional A320s over the next seven months, including four aircraft in 4Q2011. AirAsia Philippines, AirPhil, SEAir and Zest are expected to grow their A320 fleets by only two aircraft in 4Q2011.

Mr Gokongwei says he also expects Cebu Pacific will remain profitable, with profits in 2H2011 expected to come in only slightly below 2H2010 levels. Cebu Pacific turned a net profit of PHP1.239 billion (USD29 million) in 2Q2011, a 23% decrease compared to both 2Q2010 and 1Q2011. “I think we’ll probably see some declines in 3Q2011 and 4Q2011 (compared to 3Q2010 and 4Q2010) but at a diminishing rate,” Mr Gokongwei says.

PAL, meanwhile, incurred a net loss for the same three months, its 1QFY2012, of PHP454 million (USD11 million), compared to a net profit of PHP1.603 billion (USD38 million) for 1QFY2011. PAL returned to the black in FY2011, posting last month its first annual profit since exiting receivership in 2007. But the carrier says it has been impacted in recent months by the increase in fuel prices, the political turmoil in the Middle East and the Mar-2011 earthquake in Japan.

PAL’s outlook for FY2012 seems rather bleak but this is not being driven by new competitors. Instead external factors and continued expansion by Cebu Pacific at the country’s three major airports – Manila, Cebu and Davao – are the primary drivers.

Total revenues at PAL increased only 1% in 1QFY2012 to PHP19.641 billion (USD461 million) while passenger revenues dropped 2% to PHP16.678 billion (USD391 million) due to exchange rate fluctuations. However, expenses jumped 13% to PHP20.095 billion (USD 471 million) due to a 29% increase in jet fuel prices and a 36% increase in fuel costs.

PAL was not able to fully recover the rise in fuel prices as its passenger yield improved by only 9% compared to 1QFY2011. PAL’s traffic was also down 7% in the quarter.

PAL financial highlights, 1QFY2012 vs 1QFY2011

Source: Philippine Airlines

Cebu Pacific, however, saw its traffic grow 15% in 2Q2011. It was able to outpace this with a 16% increase in revenues to PHP9.21 billion (USD216 million). Passenger revenues were up only 10% to PHP7.564 billion (USD177 million) as the average fare dropped 7% despite the increase in fuel prices. This was partially offset by higher ancillary revenues, which more than doubled in 2Q2011 to PHP1.146 billion (USD27 million).

Total operating expenses for Cebu Pacific increased 35% to PHP7.816 billion (USD183 million), driven by a 60% increase in fuel costs. Unit costs increased 11% but more importantly ex fuel unit costs were down by 5%. Cebu Pacific expects further reductions in its ex fuel unit costs as it continues to expand its fleet and network.

Cebu Pacific financial highlights, 2Q2011 vs 2Q2010 and 1Q2011

Source: Cebu Pacific

Cebu Pacific reported an 88.6% load factor in 2Q2011, a 0.4ppt improvement over 1Q2011 and a company all-time record for any quarter. Total passenger traffic grew 15% to 3.1 million passengers, including a 13% increase in domestic passengers to 2.4 million and a 21% increase in international passengers to 700,000. Mr Gokongwei says the carrier is “on track” to meet its goal of carrying 12 million passengers in 2011.

Total domestic traffic in the Philippines grew 14% in 2Q2011 to 5.15 million passengers, with AirPhil and Zest recording the biggest gains. Both carriers, which have transitioned from full-service to low-cost models in recent years, are coming from much smaller bases than Cebu Pacific.

PAL saw its domestic market share slip 9.2ppt to 23.7%, but this was primarily driven by its continued shift of domestic capacity to partner AirPhil Express. AirPhil, which is owned by PAL’s majority stakeholder and is leasing its A320s from PAL, saw its market share improve by 8.3ppt to 18.6%. Zest Air saw its market share grow 4ppt to 12.1%.

Domestic market share in the Philippines by carrier, 3Q2009 to 2Q2011

Source: Cebu Pacific, based on data from Philippine CAB

SEAir, which only operates turboprops on domestic routes, saw its domestic market share drop from 1.4% to 1%. The carrier has been trying to expand its A320 Tiger-branded low-cost operation into the domestic market but so far has not succeeded in its controversial attempt to secure domestic authorisation to use A320s leased from Tiger on domestic trunk routes from Manila International. PAL, Cebu Pacific, AirPhil and Zest have objected to the plan.

Tiger, which plans to acquire a stake in SEAir should the carrier succeed at entering domestic trunk routes, has said it remains confident it will receive the required authorisations. But Mr Kingshott says he is not aware of any changes in the status of the Tiger-SEAir application since the Philippine CAB issued a show cause order in May-2011 and forced SEAir to halt tickets sales on the planned Manila-Cebu and Manila-Davao routes.

Cebu Pacific, meanwhile, is planning to increase capacity in 4Q2011 on both Manila-Cebu and Manila-Davao, which are by far the biggest routes in the Philippines. Cebu is also adding a new domestic destination in Oct-2011, when it launches service to Tawi-Tawi, its 50th destination overall.

The additional domestic capacity in 2H2011 comes after Cebu Pacific has focused most of its expansion in recent months in the international markets. Mr Gokongwei acknowledges some of the carrier’s recent international expansion - which primarily includes additional capacity to Hong Kong, Singapore, South Korea and Thailand - did not perform well initially. Mr Gokongwei now expects improvement over the next few months, pointing out it takes longer for new international flights to mature compared to domestic routes.

International market share in the Philippines by carrier, 1Q2011 vs 1Q2010 and 2010 vs 2009

Source: Cebu Pacific, based on data from Philippine CAB

On an ASK basis, Cebu’s domestic capacity was up 12% in 2Q2011 while international capacity jumped by 34%. Domestic RPKs were up 15% while international RPKs were up 26%, showing a drop in international load factor although the carrier’s overall load factor was an impressive 88.6%. Mr Gokongwei says the second quarter is the best quarter in the Philippine domestic market and as a result domestic flights were over 90% full in 2Q2011.

Showing further confidence of its position in the market, Cebu Pacific last month accelerated fleet expansion by committing to two additional leased A320s for delivery in Mar-2012. The new leases means Cebu Pacific is now slated to add a total of four A320s in 2012. Its four A320 deliveries now slated for 4Q2011 will result in a fleet of 29 A320 family aircraft along with eight ATR 72s at the end of 2011.

Another seven A320 deliveries are slated for 2013. The carrier in 2014 expects to take delivery of five A320 deliveries, but these will largely replace four aircraft being returned to their lessors.

Cebu Pacific fleet plan, 2009 to 2014

Souce: Cebu Pacific

Commitments to expand the fleet beyond 2014 were made in Jun-2011, when Cebu Pacific exercised options for seven additional A320s for delivery in 2015 and 2016 while placing a new order for 30 A321neos for delivery from 2017 to 2012.

Cebu Pacific plans to use A321neo on its existing high frequency routes

In placing the order, Cebu Pacific citied the improved range of the A321neo would enable the carrier to open new longer-haul routes to Australia, India and northern Japan. Mr Kingshott, however, said last week that the main driver in Cebu’s decision to order the A321neo is the attractive seat economics the stretched aircraft will offer on existing routes. “It’s less about the additional range and the markets it offers,” he explains. “It’s much more about how much a game changer it is in terms of costs.”

Mr Kingshott expects Cebu Pacific will be competing mainly against the A320neo because so far the region’s other low-cost carriers have only ordered the A320neo, not the A321neo. As a result he believes Cebu Pacific will "have a unit cost advantage".

Cebu Pacific does not anticipate having any problems finding routes for the larger A321neo, which will be configured with 220 seats. Mr Kingshott says several existing routes - including Manila to Hong Kong, Cebu and Davao – are now served with several frequencies, indicating a larger aircraft could be used.

Cebu Pacific does not see any reason to slow down growth even as local competition further intensifies. Cebu Pacific has an advantage in that it already is the largest carrier in the Philippines in terms of seat capacity.

Top 10 carriers in the Philippines by capacity (seats per week, to/from/within), 22-Aug-2011 to 28-Aug-2011

Source: Centre for Asia Pacific Aviation and Innovata

Cebu Pacific is also the largest carrier by seat capacity at all three major Philippine airports - Manila, Cebu and Davao. The carrier currently operates 213,000 seats per week at Manila, 58,000 at Cebu and 26,000 at Davao. At Clark, Cebu Pacific only has 6,000 seats per week.

AirAsia Philippines to impact SEAir and Spirit of Manila

AirAsia’s launch at Clark will more likely have an impact on the two existing Clark-based carriers, SEAir and Spirit of Manila. Clark sits in a free trade zone and has an open skies policy while Manila faces significant bilateral and slot restrictions. As a result rapid capacity growth at Clark will likely be generated as both AirAsia Philippines and SEAir/Tiger expands.

As a new entrant it will be difficult for AirAsia to get access to Manila International. Access wouldn’t be as much an issue for SEAir because it already operates turboprops from Manila but as its existing A320s are leased from a foreign carrier, Singapore-based Tiger, it requires regulatory permission to operate them from Manila.

Malaysian routes fallback for SEAir if domestic expansion rejected

All of SEAir’s existing Tiger-branded Clark routes will face new competition from AirAsia Philippines. SEAir recently applied to serve from Clark three Malaysian destinations – Kuala Lumpur, Kuching and Kota Kinabalu – and may add the routes in 2H2011 if it does not receive approval to operate its next two A320s domestically from Manila. If launched, the new Malaysian routes would further intensify competition between SEAir-Tiger and AirAsia as Malaysia AirAsia already operates daily flights to Clark from Kota Kinabalu and Kuala Lumpur.

There is huge demand in the Philippines-Malaysia, Philippines-Singapore and Philippines-Hong Kong/Macau markets given the huge Filipino migrant worker populations in these countries. But there is already a plethora of seats in these markets and extremely low fares may be needed to stimulate enough demand to cover the capacity increases, particularly at Clark.

Consolidation in the Philippine low-cost market seems inevitable. Spirit of Manila, which hasn’t expanded its fleet beyond two aircraft since launching in 2008, could be the most vulnerable. But even excluding Spirit of Manila, five low-cost carriers for a market the size of the Philippines could prove to be one or two too many.

Thai Airways, All Nippon Airways and Singapore Airlines have all announced plans for new low-cost carriers in recent months, while last week Australia's Qantas Airways and Japan Airlines said they are planning a low–cost joint venture too. These new entrants will have to fight it out with the likes of Indonesia's Lion Air, Singapore's Tiger Air, and market leader AirAsia of Malaysia, as well as Cebu Pacific.

"Basically, the market has seen the value of low-cost carriers in Asia," says Mr. Gokongwei. "I think it's really a validation of the model."

Asia's travel sector is expanding rapidly on the back of the region's growing wealth. But competition will make business tougher and could drive down fares. The industry is also coping with rising fuel costs, while a slowdown in the global economy would also put a dent in traffic.

Cebu Pacific launched in 1996 and began flying to international destinations in 2001. The no-frills airline had the second largest ever initial public offering on the Philippine Stock Exchange in October. It said last week that first-half net profit fell about 23% mainly due to a 50% jump in the price of fuel.

Passenger revenue continue to rise, however, and the airline has placed orders for new aircraft that will more than double its existing fleet.

Mr. Gokongwei spoke to The Wall Street Journal's Alexandra Wexler about the challenges of keeping true to the low-cost model amid soaring fuel costs, planning for an expanding market, and distinguishing Cebu Pacific from the competition. The following interview has been edited.

WSJ: Are you concerned about rising competition including from Qantas, Singapore Airlines and others?

Mr. Gokongwei: There are very few examples of full-cost carriers executing on the low-cost carrier model. I think that the DNA of a low-cost carrier and a full-cost carrier is really very different.

WSJ: How will AirAsia's plans to enter the Philippines affect your business?

Mr. Gokongwei: One, the market will continue to grow. It will also further boost tourism into the Philippines, and that will help our domestic network. Very few tourists stay in Manila, and Cebu Pacific has 45% of the domestic market in the Philippines.

WSJ: What are your biggest challenges?

Mr. Gokongwei: There's always a temptation to stray from the low-cost carrier mindset, and we have to be very focused on keeping our operations very simple and scalable. We see a lot of low-cost carriers stray from their roots, which made them successful. They start offering premium seats or lounges in that effort to get that extra 1% of business.

WSJ: What are some of the rising costs you're dealing with?

Mr. Gokongwei: As we grow, the biggest issue we're facing is the cost of fuel. Over 50% of our cost today is fuel. We have to improve efficiency and reduce our non-fuel unit cost. We have tried to recover this through fuel surcharges and increased ancillary revenues.

WSJ: How are consumers on budget airlines different than customers on traditional carriers?

Mr. Gokongwei: I don't think there's a major distinction. Everyone is focused on value today. I learned the hard way about trying to introduce business class and lounges- the Philippines itself is not a hub conducive for that. I have to focus on not getting caught in the middle market, because the middle is disappearing.

WSJ: Hong Kong issued a travel alert on Manila last August after a hostage crisis that resulted in the deaths of several travelers from the city. How has that affected Cebu Pacific?

Mr. Gokongwei: We at Cebu Pacific first want to convey our deepest sympathies with those who had loved ones who were lost last year. We are very hopeful that there will be a resolution between the Philippines government and those who were affected as soon as possible. I think on a traffic basis, initially of course there was an effect, especially on the Hong Kong-to-Cebu route. It seems to have recovered for the first six months of this year--traffic is up 9% year over year.

WSJ: Where do you expect to see the most growth?

Mr. Gokongwei: We prefer to offer more frequent flights on routes we already have, versus introducing new routes. In the last six months, we've added frequency to Singapore, Kuala Lumpur, and Bangkok. In terms of new routes, there are lots of opportunities in northern Asia. There are lots of cities in Thailand and Japan that we'd like to add flights to.

WSJ: How do you expect the airline industry to grow in the next five to 10 years?

Mr. Gokongwei: In 2005, we were carrying 2 million passengers a year, and I think we had about a third of the domestic market. The domestic market will be 20 million this year, and we expect to carry 12 million passengers. We believe that air traffic [in the Philippines] will grow two to three times the GDP growth. In addition, low-cost carriers will continue to gain market share from traditional carriers. We have made the necessary plane orders to support this type of growth, including taking in a total of 53 new aircraft between September of this year and 2021.

By Amelia H.C. Ylagan

August 21, 2011
A Look at Philippine Airlines Privatization and Outsourcing

Cory Aquino’s six-year term as first President after the momentous People Power EDSA Revolution of 1986 had just ended, and it was the turn of Fidel Ramos to be President, in the fading euphoria of the country’s deliverance from the 14-year dictator Ferdinand Marcos. What to do, when faced with the stark embarrassment of the country’s dismal economic performance, which threatened to make pyrrhic the political victory of EDSA I?

Privatization of the country’s giant government-owned and -controlled corporations (GOCCs) was the answer, as coaxed by the International Monetary Fund (IMF), which was concerned about the repayment of the country’s huge foreign debt (debt service = 6% of Nominal GNP of P703.4 billion in 1992). The Philippine Privatization Program (PPP) launched by Aquino in 1986 and its implementing group of government offices, the Asset Privatization Trust (APT), were given another five years (until 1995) under the Ramos administration to sell initially the biggest 26 GOCCs among the 122 earmarked.The over 400 government holdings divested between 1987 and 1995 generated gross revenues of P111 billion (US$4.2 billion) -- nearly three times the government’s original target figure of P41.12 billion for the privatization program.

Philippine Airlines (PAL), with its $521-million debt assumed by the national government in Central Bank short-term debt, commercial bank borrowings, and Paris Club obligations as of 1992, was one logical target for privatization. The Gulf War then raging had battered PAL to a staggering P2.2-billion loss (FX rate in 1992 was P27.83=$1.00, just depreciated from P22.7=$1.00 in the previous year). The government was bleeding by owning PAL.

Yet when the government was privatizing Philippine Airlines in late 1991, every big businessman seemed to want it. To level the playing field and make those probably more desirable buyers with less wherewithal compete with big spenders suspected to be tainted with "Marcos money," it was agreed that offers will be entertained from consortiums, not individuals or individual corporations. PR Holdings, Inc., a consortium led by Antonio O. Cojuangco (then chairman of PLDT), formed by two major corporate groups, AB Capital Investment Corp. (ABCIC) and the Bank of Commerce (BoC),paid $368 million for 670 million shares (67%) of PAL.(The 130 million shares retained by the government had an accrued value of $71 million.)The government realized a total profit of $168 million from the PAL privatization.

A year after the Cojuangco group had taken over PAL, news erupted that P5.1 billion of the P9.780 billion put up by PR Holdings was actually secretly paid by cigarette and alcohol magnate Lucio Tan, a known Marcos crony. This was deeply resented by the Ayala and Soriano Groups, investors in the PR Holdings bid for PAL, according to a 1994USAID "post mortem" of the PAL privatization. (The two unhappy investors were soon "refunded.") For a while there, it was thought that the PAL privatization would be reversed for the non-disclosure of the Tan participation, but perhaps it was just too messy for the government to have to return the $368 million proceeds of the sale, or to call the PR Holdings bid in bad faith and award the sale to the next highest bidder, the PCI Bank/John Gokongwei consortium (bid=P9.170 billion). That did not happen, and Tan companies Trustmark Holdings, through PAL Holdings, still now own 5.3 billion (97.7%) PAL shares.

Despite the financial ups and downs (mostly downs) of PAL as a privatized entity, the going seems good for its investors. In accordance with the approved restructuring plan during the 1997 Asian financial crisis and way before that, even in the rehab template incorporated in the privatization offer, the non-core (non-flying) activities were to be spun off to strip the airline of risk in the fluctuations of those businesses. In-flight catering, ground handling, and aircraft maintenance were all consolidated under MacroAsia Corp. (MAC), a Tan-owned company which had built up a record one billion pesos in operating revenues in 2009. Meantime, the airline itself has ground down to a $10.6-million (about P455-million) loss in 2010. And there is wailing and gnashing of teeth about forthcoming spin-offs and lay-offs again.

Naturally, spin-offs of whole departments would cause redundancies in personnel, even if most are absorbed by the new operational entity. Disputes with the employees’ union have been PAL management’s biggest headache. This had led to a complete shutdown of PAL’s operations for a month in 1998, earning PAL the notoriety of being the first Asian airline to do so, a most embarrassing failure for an airline anywhere in the world. And here it is again, with the 3,500 PAL employees union threatening to do the very same sit-down strike, in protest of the planned lay-off of 2,600 employees in in-flight catering, call center reservations and airport services, as sanctioned by the Department of Labor for implementation this month.

Before PAL was privatized, there were over 11,500 employees (15,000 at an earlier peak before EDSA I) which included administrative and management personnel, cockpit and cabin crew, ground engineers and technicians, and rank-and-file employees doing administrative, flight operations, and other related services such as cargo handling, ground handling, catering, in-flight sales, refueling, and aircraft maintenance services. That is more than 60% reduction in workforce (basically because of the spin-offs and the early retirement incentives) over the two decades or so. Time enough for the employees to realize that lifetime employment is not in the plans of any businessman who buys a failing airline. Advice would be to try to negotiate the retrenchment package (now 1.25% of present accrued benefits) upward, take the money and go. Forget about the lifetime trip passes (non-revenue tickets) -- these are based on PAL’s lifetime, not yours! If you (still) wish, apply for employment in the spun-off airline support companies, to maximize your special talents and expertise in the field.

Privatizations dramatize the realities of business acquisitions of these entities after the "quick fix" enjoyed by governments on critical political/economic predicaments, such as the tremulous decade of 1990-2000, when the world economy was in a dead-fall due to the financial, food, oil, and Middle East crises. Not only the new, reformed Philippine government did extensive privatizations during this period. In fact this was the "thing to do" then, spurred by the successful privatizations of Margaret Thatcher in the UK. But all that being done, realignments in the social and economic individual and shared situations cannot but be resignedly made. Unfortunately, unions have lost their clout, aggravating the effects of spin-offs, mergers, sell-offs, because of the now very prevalent global business practice of outsourcing.

And what if PAL is again sold? The trouble with hello is goodbye. -- Businessworld

AIR ASIA PHILIPPINES ARRIVES AT CLARK. Cabin crew of AirAsia Philippines pose for photos next to an Airbus 320 shortly after arriving from Toulose, France, at the former US military Clark air base in Angeles City, north of Manila on August 15, 2011. Malaysian budget carrier AirAsia Inc. launched its new hub in the Philippines with the arrival of the Airbus A320-200 at the Clark freeport. It had technical stops in Sharjah, UAE and Penang in Malaysia before heading to its final home. AFP PHOTO/TED ALJIBE

MANILA, Philippines—The local unit of Malaysia’s AirAsia Berhad, dubbed as “mother of all budget airlines,” officially landed in the Philippines as it took delivery Monday of the first of several planes to be based in Clark Freeport in Pampanga.

AirAsia Philippines, a joint venture between a local group—Antonio “Tonyboy” Cojuangco Jr., Michael Romero and Marianne Hontiveros—and Malaysia’s Tony Fernandes, aims to become one of the leading players in the country’s competitive air travel sector.

According to company officials, AirAsia is scheduled to start regular flights from Clark by October this year once it receives the required government permits.

The officials, in a briefing on Monday, said the airline would start with popular regional destinations such as Singapore, Hong Kong and Macau.

“This is a proud moment for AirAsia Philippines as the arrival of the new aircraft signifies our first step in introducing ourselves to the nation,” said Hontiveros, AirAsia Philippines’ president and CEO.

AirAsia Philippines expects to take delivery of its second plane by the fourth quarter of this year, while two more are scheduled to arrive by next year.

The company intends to turn Clark, which it earlier chose as its home in the Philippines, into a major hub in Asia-Pacific.

Hontiveros said the Diosdado Macapagal International Airport (DMIA) could become a jump-off point for passengers from other countries who might want to fly to other destinations within the range of the Philippines.

AirAsia’s fleet is made up mostly of Airbus A320 aircraft, which can fly for only about four hours at a time.

She said Filipino passengers would be able to take advantage of AirAsia’s regional network to reach more destinations.

Romero, the joint venture’s vice chairman, said the company aimed to have a total of 13 to 15 new planes in three to five years. “But if you look at the way AirAsia has expanded in other countries in the region, they usually reach their five-year targets in as fast as two years,” Romero said.

AirAsia Philippines is the group’s third subsidiary in Southeast Asia, next to AirAsia Indonesia and AirAsia Thailand.

Hontiveros said the company also aimed to turn the DMIA into a hub for long-haul flights to destinations such as Europe and the United States.

AirAsia Philippines’ sister company, AirAsia X, has direct flights to London and Paris.

Romero said the Philippine unit was not ruling out the possibility of mounting long-haul flights of its own, particularly to the US.

Clark International Airport Corp. president and CEO Victor Luciano said AirAsia Philippines was expected to be one of the biggest players in the country’s competitive airline industry. “We want (AirAsia) to propel Clark to new heights in years to come,” Luciano said.

This follows the airline’s review of its current inflight duty free programme and an evaluation of future requirements to enhance passenger service.

PAL and ISG have signed an exclusive supply agreement for an initial two-year period plus a performance-based option period, with their first programme slated to go onboard 1 November 2011.

Prior to its partnership with ISG, PAL was one of the few airlines in Asia that manages its duty free programme in-house. “The decision to tap ISG represents a very significant shift in PAL's strategy,” the companies noted in a statement.

ISG Managing Director Tony Detter said he was enthusiastic about the company's new partnership with PAL. “We’re honoured to be selected by Philippine Airlines as their partner to re-engineer this inflight shopping service, and are already hard at work with the PAL team to ensure we have a great first programme launch and a smooth transition," he said.

Delight on all sides as an important new inflight relationship is forged between Philippine Airlines and Inflight Sales Group
“PAL has a very good core business and knows its customers quite well. Our job at ISG will be to introduce new brands and categories to the existing programme, leveraging our knowledge and brand portfolio to attract a broader base of customers to the Fiesta Boutique shopping program."

PAL Senior Assistant Vice President-Catering Services Jaime Arturo L. Viola said: “PAL is pleased to work with Inflight Sales Group. We were very thorough and careful during our review of our business and in making the decision to expand and refocus our duty free programme.

“We’re confident ISG is the right partner to help us grow our business, develop new shopping channels, and improve our promotional and crew motivation strategy. ISG has a long history of successful innovation with their product offerings and marketing programmes, and are well respected in the travel retail industry both for their ability to increase sales and to add value to their customers. We look forward to a mutually beneficial relationship with them.”

ABOUT PHILIPPINE AIRLINES

Philippine Airlines – Asia’s first airline – is the flag carrier of the Republic of the Philippines. This year marks the 70th anniversary of its first flight on March 15, 1941. PAL offers more than 70 flights to 25 international destinations daily on a modern fleet of aircraft including the Boeing 777-300ER and Airbus A340-300, and carries close to 25,000 passengers and 350 tons of cargo daily. More information is available at www.philippineairlines.com

ABOUT INFLIGHT SALES GROUP

Inflight Sales Group is the pioneer of airline concession operations, with more than 25 years of airline duty free concession management experience. Inflight Sales Group's predecessor was formed by Jean-Marcel Rouff in 1982 to supply amenity kits and as an exclusive distributor of duty free products from the leading suppliers to airlines in Asia and North and South America. Today ISG remains the leading concessionaire in Asia and North Africa, servicing 17 airline partners around the globe. More information is available at www.inflightsales.com

MANILA, Philippines — Emirates’ ground handling unit Dnata, the fourth largest combined air services provider in the world, has rebranded its business in the Philippines as part of its global brand realignment.

The successful contribution the Philippine business makes to dnata’s global business was acknowledged in Manila as customers, suppliers and both local and international employees celebrated the start of a new era which will see positive changes to the business over the coming months.

Dnata’s profile and reputation in the Philippines have risen significantly since 1998 – when it first established its operations in the region as ‘dnata Inc.’ – the only internationally owned ground handling agent in Manila's airport.
Services offered by dnata in the Philippines include passenger, ramp and baggage services; cargo handling and ground support equipment.

The firm has invested heavily in its Manila operations, with the purchase of new equipment, introduction of staff training initiatives and renovation of their offices.

The operations have seen significant growth during the years since, with an increase in new customers and organic growth by existing customers.

Today, dnata is one of the most successful and highly reputed handling agents in the Asia-Pacific Region with customers including Emirates, Qatar Airways, Hawaiian Air, and Air China.

“We are proud to have strong roots in the Philippines, the team here has worked hard and played an important part in establishing our reputation in the region as a respected global air services provider,” said Dnata President Gary Chapman.

He added that ‘dnata in Manila has excellent potential for growth, future success and to play its part in dnata’s global team effort to achieve its vision of becoming the world’s most admired air services provider.”

The brand re-fresh has come at a key time for the dnata team in the Philippines in particular, having recently welcomed a new General Manager Margaret Yu – who has been appointed to take the lead as the business enters this new era.

“We have more than 200 dedicated staff working at the Ninoy Aquino International Airport, a number of whom have been with the team since we first began our operations in Manila,” said Yu.

She said “the collective knowledge and experience we possess makes us a strong team and enables us to deliver the very best service to our customers. Add to that the combined knowledge, experience and reputation of the rest of the dnata family worldwide and we have a bright future ahead of us.”

DOMESTIC air travel rose by double digits in the first half of the year, boosted by airlines’ agressive expansion and price wars, according to to the Civil Aeronautics Board.

Data from CAB showed the number of domestic passengers rose 15.9 percent to 9.72 million from 8.39 million in the same six-month period last year.

The country’s five major carriers’ seat capacity jumped 16.76 percent to 12.12 million from 10.38 million last year.

Domestic load factor, which measures the number of seats occupied during a flight, averaged 79 percent, up from 77 percent last year. The industry’s increasing load factor reflects a steady growth in passenger demand.

In a text message, Carmelo Arcilla, CAB executive director, attributed the passenger growth to the liberal policy of the government that has encouaged competition and expansion of existing services.

“Another factor is the high acceptability of the low cost airline model that offers very reasonable and competitive fares,” Arcilla said.

Cebu Pacific remained the leading domestic carrier during the period, but the increase in its passengers was lower than other budget airline such as AirPhil Express and Zest Airways, both of which have been agressively expanding their fleets and destinations.

Cebu Pacific carried a total of 4.25 million passengers, up by 3.9 percent from 4.09 million last year. Its load factor however fell to 84 percent from 85 percent.

In a telephone interview, Alfredo M. Herrera, Airphil Express senior vice president for marketing and sales, said the huge increase in passengers was driven by the airline’s competitive fare and increased capacity.

He said the airline has been successful in snatching passengers from rivals, while gaining new travelers.

Herrera said AirPhil Express expects to carry more than four million passengers by end of the year.

Zest Airways recorded an 85.34 percent increase in domestic passengers to 1.14 million from 616,058 last year.

Butch Rodriguez, ZestAir senior vice president for commercial and external affairs, attributed the growth to the doubling of its fleet from three Airbus A320s to six, as well as to more destinations and frequencies.

Philippine Airlines recorded a 17 percent decline in domestic passengers to 2.39 million from 2.88 million last year.

Southeast Asian Airlines also posted a drop in passengers to 97,326 from 132,416 last year.

Industry-wide cargo dropped to 80.78 million kilograms in the first six months as against 83.6 million last year.

Like the now famous quote of the President of the Philippines in his State of the Nation Address in 2011 "Ang sa Pilipinas ay sa Pilipinas", literally translated to mean that flying in the Philippines remains to be largely a Filipino business. And so it was for Tiger airways and its five year struggle to gain a foothold in the country.

Tiger Airways, (established 2005) a low cost subsidiary of Singapore Airlines, recently announced sometime in February 2011 plans to acquire 32.5% stake in the Philippines only leisure airline, Southeast Asia Airlines (SEAir), the smallest operating airline in the country with regular scheduled trips.

But that was not the first time Tiger's intent to set up a local subsidiary was announced. The Philippine affiliate plan was laid on the table as early as late 2005 after its organization but was made public only September 26, 2006, for a flight commencing February 2007.

The venture involves initially the dry subletting of two Tiger planes in the colors of SEAIR, but desires to implement the agreement was put to the test after Philippine registered carriers objected to the agreement as a clear circumvention of "cabotage rules", thus, the objections.

The airline's international flight plans was approved by CAB, so the long delayed official launching on December 16, 2011 to three international points.

Tiger began international flights from Clark by proxy, to Singapore, Hong Kong, and Macau. It has pending application to fly Kuala Lumpur and Kota Kinabalu in Malaysia. It also applied Kutching, Penang and Langkawi flights from Clark under the Asean open skies initiative.

SEAIR was planning to add two Tiger A320s in Jul-2011 and launch domestic services. It already operated two Airbus 319's out of Manila-Clark. But the CAB forced SEAir to suspend the launch of Tiger-branded domestic flights due to "cabotage claim" by local airlines. Air Asia's local subsidiary cautiously took notice and decided to fly overseas.

Cabotage Rights

Cabotage rights has its origin in Maritime law, first applied in France, literally meaning to navigate along the coast. The French translation refer to it as coastal Navigation while the English refer to it as Coastal trade.

Navigation refer to nautical operations while Coastal trade refer to sales of services, like freightage and carriage of persons and goods for profit. Aerial cabotage, applying the English rule to maritime, follows the latter.

The English objective for Cabotage was for the protection of national shipping activities within its territory from foreign competition, which as a matter of national policy should be protected from competition by a foreign owned vessels.

From the 1900's maritime cabotage referred to economic protection. It was later adopted to mean the same thing upon the introduction of aerial cabotage. It is fondly associated with the principle of Sovereignty in international civil aviation, as the right of the State to exclude foreign owned airlines from operating within its territory.

The Freedom of aerial navigation (aerial cabotage) was actually introduce by the French in 1910 during its first aerial convention held at Paris. The Germans introduce the reciprocity rule, allowing foreign aircraft operator to operate domestic as long as the other State opens its borders to the latter State's aircraft operators.

The German proposal was not however admitted. Instead, what was adopted was that the right to aerial trade would be subject to limits within the other States territory and further security restrictions, thus formed the basis of the State's Air Services Agreement (ASA) with other countries where they have diplomatic relation.

A Philippine Tiger?

There is no doubt that SEAIR is a local airline entitled to cabotage rights within the Philippine shore. Its partner however isn't, and by carrying the name tag of the latter to its marketing strategy puts its domestic plans in limbo.

For a start, Singapore has no domestic territory to fly. The Philippines has vast area of airspace with 90 million people as market.

The airline's plan to fly domestic via SEAIR to Cebu and Davao ran a snag as it intend to make international connections to Hong Kong and Singapore.

But former Silk Air CEO and now Tiger Airways newly-installed group chief executive Chin Yau Seng said on the joint venture agreement that without a domestic operation in the Philippines, the Tiger Group investment wouldn’t make sense for Tiger and the deal will not be completed until approval is secured for domestic services.

Chin expects the issue to be resolved with SEAIR officially becoming a Philippine tiger following the footprints of LCC heavyweight Air Asia which intends to launch flight out of the country by October.

Legal complications goes back to cabotage rights and patrimonial issues, which the local carriers are very sensitive.

Second, Airlines are grantees of Legislative franchises from the government. Which means that their operation should be subject to control and regulation by the Philippine Government and not that of Singapore to which the airline is based.

“We are engaged in discussions with the relevant people over there” says Chin.

“Were hoping on getting the issue resolved” adds Chin.

Tigers plan in the Philippine is to grow the Philippine fleet to five at the end of the year. It currently operates 28 Airbus A320's with 9 more orders coming by 2012.

Chin said that 6 of the additional 9 aircraft have been allocated to Tiger Singapore, giving it a modest fleet of 20 A320s by the end of the fiscal year, while embattled Tiger Australia kept its current fleet of 10 A320s. The remaining 3 aircraft has been allocated to its Philippine affiliate.

Tiger Singapore already took aircraft deliveries intended to the Philippine affiliate and should start flying Davao and Cebu segments out of Singapore by November.

"Tiger Singapore cans still take another aircraft or two beyond current plans, but the Singapore market would not be able to support the group’s entire fleet" said Chin.

The Tiger group intends to grow its fleet to 68 aircraft by December 2015. Where these aircraft end up depend on Tiger’s progress in setting up its three planned joint ventures and potentially other new affiliates in Asia.

Tiger also has in place a contingency plan to sublease to other carriers some of its newly delivered aircraft, as well as potentially some of the 10 A320s in Australia should that operation be reduced in size, if all three of its three planned joint ventures are unable to launch this fiscal year.

Tiger Airways is the 8th largest low cost carrier in Asia Pacific Region behind Air Asia and Cebu Pacific at number one and fourth place respectively.

Singapore - Budget airline Tiger Airways has announced that they will add Cebu and Davao, the Philippines second and third largest metropolitan City to their route network effective October 1 and November 1, 2011, respectively.

The Singapore Airline's low cost subsidiary will fly Cebu daily and Davao three times a week with the following schedules:

Tiger Airways entered a joint-venture agreement with South East Asia Airlines (SEAIR)to fly domestic points across the Philippines but the deal was challenged by local airline operators Philippine Airlines (PAL), Cebu Pacific (CEB) AirPhil Express and Zest Airways. Resolutions are pending at the Civil Aviation Board (CAB).

SEAir currently flies to Singapore, Hong Kong and Macau from its hub at Manila-Clark using let planes from Tiger Airways.

It was supposed to be a SEAir flight until the restraining order came out preventing the airline from flying Tiger planes for domestic flights to Cebu and Davao.

The CAB said that they issued a cease order against these planned domestic routes due to possible violations of the constitutional provision that bars foreign entities from providing transportation services within the country.

MANILA, Philippines - Airphil Express is on track to dominate the budget air travel category in the Philippines with the launch of the Cebu-Hong Kong route last July 28, 2011. The new flight connection is seen to further boost business and tourism between the two destinations and will strengthen the presence of Airphil Express beyond domestic borders.

Cosmopolitan Cebu province in the Visayas region, which is rich in heritage appeal, attracts domestic and foreign tourists and investments because of good infrastructure and a dynamic export industry, and serves as gateway to some of the world’s most breathtaking shorelines and nature attractions. Hong Kong, host to many thousands of OFWs, remains an important business hub, shoppers’ paradise, and, with the presence of Disneyland and other theme parks, continues to be a favorite destination among Filipinos. The expanded route of Airphil Express redounds to the benefit of passengers who want savings and convenience in their frequent business and pleasure travels.

“The decision to launch the first Hong Kong flight of Airphil Express from Cebu is an acknowledgment of the valuable business that the province brings into the country in terms of trade and tourism,” said Alfredo Herrera, Airphil Express SVP for marketing and sales. The addition of the Cebu-Hong Kong route follows the success of Airphil Express’ launch of its international flight to Singapore in December last year.

Another company milestone by the end of July is the arrival of a new A320 in addition to the current six Airbuses as part of Airphil Express’ re-fleeting program. The A320 is one of the most modern airplanes today and ensures increased comfort and safety for passengers. The budget airline also maintains three reliable Q300s and five high-speed Q400s for inter-island travel.

The new Cebu-Hong Kong route and the company’s investment in new aircraft are in service of a continuously growing air travel market. While traffic growth from all Philippine carriers remains at double digits this year, the rise of Airphil Express’ market share has been described as “staggering.” From cornering 2.9 percent of the market share during the airline’s pre-rebranding period in 2009, the carrier’s slice of the domestic market in 2010 grew to 11 percent, representing some 1.9 million passengers on its first full year of operations.

Only a little more than a year old, Airphil Express is already redefining the budget category not just in terms of low airfare but also other services.

Two five-year old helicopters sold as brand new to the Philippine National Police in 2009 were among the five choppers that then First Gentleman Jose Miguel “Mike” Arroyo acquired for the campaign of his wife, then President Gloria Macapagal-Arroyo, in the 2004 presidential election.

This was disclosed by a businessman, who was privy to the sale of the helicopters to Mike Arroyo in late 2003. The businessman is scheduled to appear as a witness at a hearing of the Senate blue ribbon committee on Tuesday.

The Inquirer tried to contact Sunday night Raul Lambino, lawyer and spokesperson of the Arroyos, to get his side but did not get any response.

Senate President Pro Tempore Jinggoy Estrada said the witness got in touch with him last week and presented documents, including copies of the record of payments made by Arroyo from December 2003 to March 2004.

Estrada said the witness, a well-known personality in the aviation industry, told him that the five helicopters—all Robinson R44 Raven Is with Series Nos. 1370 to 1374—were purchased for use in the 2004 election campaign of then President Arroyo.

Initially, the witness said Mike Arroyo only wanted to lease helicopters from Lionair, exclusive distributor of Robinson helicopters in the country.

However, Mike Arroyo was told that all Robinson units at the time were already out on loan to his wife’s political rival, Fernando Poe Jr.

Documents shown to the Inquirer indicated that Mike Arroyo paid a deposit of $95,000 each for the five units on Dec. 11, 2003, for a total of $475,000. The net balance of $948,025 was paid from March 2 to March 9, 2004. A total of $1,423,025 was paid to Lionair for the five helicopters.

Cash payments

Estrada said all helicopters were paid for in cash that a Lionair representative would collect from the LTA Building, which belongs to Arroyo’s family, on Perea Street in Makati City.

Estrada said the witness claimed that in early 2004, the helicopters were sent via air cargo to Asian Spirit, an airline company in the Clark Freeport Zone in Pampanga.

“He (the witness) said this was done because Asian Spirit was a locator in Clark, meaning it can receive goods without paying taxes and the new owner of the choppers at that time wanted to avoid paying them,” Estrada said in an interview.

“At that time, Asian Spirit and Lionair were owned by one person. But Asian Spirit has since been sold to Zest Air,” the senator said.

Investment banker Noel Oñate sold Asian Spirit for P1 billion in 2008 to AMY Holdings of Alfredo Yao, owner of juice maker Zest-O. A year later, Oñate led a group that acquired the preneed unit Pacific Plans Inc. from the Yuchengcos for P250 million.

Speedy delivery

Estrada added that the witness also pointed out the speed by which the helicopters were delivered. It usually takes six months to deliver a brand new helicopter, according to the witness.

“But he said that in the case of (Mike) Arroyo, this was expedited to three months only. From the time the deposit was made (in December) until full payment (in March),” the senator said.

Supt. Claudio Gaspar, a licensed pilot of the PNP, said under oath last week that he was familiar with two of the helicopters owned by Mike Arroyo. This is because Gaspar frequently ferried Mike Arroyo and his son, Juan Miguel “Mikey” Arroyo, from 2004 until the two units were sold to the PNP.

The two units were sold along with a brand new Robinson R44 Raven II to the PNP in 2009 for P105 million. Senators have raised a howl over the transaction since the PNP paid the full price for the old units passed off as brand new.

Gaspar said that while he was aware that the units were old, he did not notify anyone in the PNP about it. He explained that he was present during the inspection “to assist” and not to warn anyone of the real condition of the units.

Gaspar, in his testimony, recalled seeing “PNP markings” being painted on the 5-year old helicopters before the inspection by a PNP team.

2 others unsold

Sen. Panfilo Lacson, in an ambush interview, said he received reports that two of the helicopters owned by Arroyo were still languishing in the Lionair hangar.

A fifth chopper, Gaspar told the Senate, crashed in 2004. Its passenger at the time, Ilocos Sur Gov. Chavit Singson, survived.

“The two unsold helicopters are still in the hangar,” Lacson said. “It is now Mike Arroyo’s problem how to get them. Because the helicopters have already been identified through their serial numbers, who’s going to buy them now?”

Lacson added that he also got word that when the helicopters arrived in Clark, “you’ll be amazed at how powerful the person who owned them was. They arrived on a Friday, disassembled and quickly assembled. By Tuesday, there were already certificates from (Air Transportation Office).”

Lacson said insiders in the airline industry disclosed that registration of a new unit usually takes two weeks to a month.

Revenue flights

Estrada, in the interview, said Mike Arroyo supposedly made money on the helicopters during his ownership.

“There were revenue flights when the helicopters were chartered to other parties. However, the witness said these parties were known to FG (a popular reference to Arroyo),” he said.

The witness allegedly told Estrada that Mike Arroyo kept “blank deeds of sale” as proof of purchase of the helicopters.

Responding to a text message on Sunday, Sen. Teofisto Guingona III said Mike Arroyo could not invoke private citizenship should he be charged with violation of the Anti-Graft and Corrupt Practices Act for selling secondhand helicopters at brand new prices to the government.

“Any person who causes undue injury to government through a manifestly gross and unjust situation will have accountability,” said Guingona, the chair of the Senate blue ribbon committee.

“Let’s not presume his guilt at the moment but he cannot invoke that he is a private citizen in this case,” the he added.

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Welcome to our blog. The Philippine aviation scene has plenty of surprises in store. We are trying to chronicle the relevant events from orbital satellites to human powered flights and all in between as we possibly could. We are also trying desperately hard to be accurate and factual as far as possible. Humans as we are we do sometimes err. Our apologies for trying to let you know to the best of our knowledge which sometimes fell short. We however value your time reading it and please do contact us for some corrections. Our heartfelt thanks for dropping by.

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